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Politics, Institutions and Project Finance: The Dabhol Power Project Case Study


Background

The Dabhol Power project was controversial from start. This came at a time when India opened the power sector to foreign direct investments. In an attempt to attract investors to finance the sector, Indian officials visited US to seek investment and technological resources for the sector.

During this visit, Enron officials expressed their interest in commissioning a private power plant. In June, Enron official visited the site in India. The project cost amounted to US$3.1 billion.

There was hurry in signing the agreement for the cost of the project. “Neither central nor state government engaged independent technical assistance or conducted a financial appraisal of the project and the main contract was concluded without competitive bidding of any kind” (Custom Book, 2011).

Two months after signing the contract, Enron submitted a comprehensive implementation proposal. According to the proposal, execution of the project was to be in two phases. Phase one involved construction of 695MW gas fired power station.

Phase two involved construction of additional 1,320MW gas fire plant. The total capacity of the plant was to be 2015MW. In May 1999, completion of phase one occurred. The Maharashtra government proposed to stop the project because the power produced was too much expensive.

Maharashtra State Electricity Board defaulted on payments to Dabhol Power Corporation. These problems continued for some time.

Thereafter, the board of Dabhol Power Corporation authorized the management to terminate the contract any time (Custom Book, 2011). This treatise discusses the inherent risks in the project.

Risk Breakdown Structure

Risk management is necessary before and during execution of a project. The process of risk management attempts to identify and assess risks. This process allows for clear understanding of risk and effective management of risk.

A project manager needs to mitigate risks so as to ensure success of a project (Hillson & Simon, 2007).

A project manager can use various models to assess risk of a project. According to Hillson (2002), risk breakdown structure is a “source oriented grouping of project risks that organizes and defines the total risk exposure of the project.

Each descending level represents an increasingly detailed definition of sources of risk to the project” (Hillson, 2002). Therefore, this structure breaks down risk in various categories. Risk breakdown structure for the Dabhol Project is as shown below.

Table 1.0

Level 0 Level 1 Level 2 Level 3
Project Risk Political Changing political environment Political instability

Bureaucracy

Inefficiency

Slow moving administration of state

Conflict in prices over approved projects.

Re-examination of prices

Approval of projects without proper appraisal

Lack of survey of the political environment

Economic Currency Fluctuations in currency since the project was in US dollars

Inflation resulting from high cost of the project

Commercial Expensive power purchase agreement

Lack of proper valuation of the project

Lack of environmental scan such as PESTLE analysis

Lack of approval of the project by the relevant authorities

Lack of appraisal of the project

Unfavorable labor market

Lack of analysis of the conditions of the foreign direct investments

Instability of financial markets in India

Lack of expertise to execute the project in the host country

Unavailability of raw materials

High cost of externalities

Failure to analyze the sources of funds

Environmental and human rights Environmental damage Pollution of fresh water

Diversion of fresh water to the project

Contamination of salt water which affects aquatic animal

Land grabbing for the project.

Human rights Harassment of protest leaders

Arrogance to the staff members and lack of transparency

Violation of human rights

Lack of involving the community in planning and execution of the project

Legal Consistency the Indian laws Some of the elements in the agreement may not agree with Indian laws

Stringent laws in the host country

Potentially most critical risks

A risk breakdown structure lists down all possible risks of a project in different categories such as legal, technological, political environment, competition, human rights, economic, and management.

These categories depend on the nature of the project. Risk breakdown structure helps in comparing projects or tenders. It also helps in risk reporting. A project with high risk exposure is likely to be unattractive.

From the risk breakdown structure, it is apparent that some risks are more critical than others. Therefore, it is necessary to separate the risks based on their impact on a project.

From the above breakdown, the most critical risks of the project are political, economic, political, environmental and human rights (Heldman, 2005). A list of these risks is as summarized below.

Table 1.1 List of risks

Rank Level 1 Level 2
1 Political Change in political environment
2 Economic Currency
Commercial
3 Environmental and human rights Environmental damage
Human rights

Analysis of nature of each risk and the factors that cause them

Political risk

The Dabhol Project occurred when the country had changing political environment. Politics determines approval and survival of such projects. Approval of the multibillion dollar project highly depends on the political leaders.

The contract with Enron was legally valid and had nothing to do with politics. However, the buyer of the Dabhol product was the state (Maharashtra State Electricity Board). Therefore, Enron had to maintain a relationship with its customer (government).

“Problems arose since it failed essentially to notice that power and politics permeate deals with government” (Custom Book, 2011). “MSEB rescinded the power contract in May 2001 because it was too expensive” (Custom Book, 2011).

Therefore, lack of support from the government led to collapse of the project. Enron pulled out from the project and quoted a price for its equity in the company.

It is also apparent that the government also barred state owned companies from buying a stake in Dabhol. Failure to appraise the financial implications of the project by the Indian Government led to collapse of the project.

Economic risk

Maharashtra State Electricity Board was the sole buyer of Dabhol Corporation’s product. With a single buyer, the project faced a risk of collapse in the event that the buyer withdrew.

The sole buyer withdrew from the project. This led to its collapsed (Crouhy, Galai and Mark, 2006). There was no survey of the market conditions of the project.

Environmental and human rights

A project manager should be cautious about damage on the environment inform of pollution. Also, it should be conscious about human rights. A project can face resistance as a result of lack of adherence with these two.

The Dabhol project led to “pollution of fresh water, diversion of fresh water to the project site, potential contamination of salt water, and land acquisition” (Custom Book, 2011). It also led to brutal handling of the people who protested against the project.

The project faced opposition from the community at large, human rights activists and environmentalists. This is because they ignored public complaints about the project. Termination of this project was the best option for the public.

References

Crouhy, M., Galai, D. & Mark, R. (2006). The essentials of risk management. United States of America: McGraw Hill Companies.

Custom Book, (2011). Project risk management: Casepack 2011. New York: John Wiley & Sons.

Heldman, K. (2005). Project manager’s spotlight on risk management. San Francisco: Jossey-Bass.

Hillson, D. & Simon, P. (2007). Practical project risk management: The ATOM methodology. Vienna, VA.: Management Concepts.

Hillson D. (2002). . Web.

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IvyPanda. (2019, July 8). Politics, Institutions and Project Finance: The Dabhol Power Project. Retrieved from https://ivypanda.com/essays/politics-institutions-and-project-finance-the-dabhol-power-project/

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"Politics, Institutions and Project Finance: The Dabhol Power Project." IvyPanda, 8 July 2019, ivypanda.com/essays/politics-institutions-and-project-finance-the-dabhol-power-project/.

1. IvyPanda. "Politics, Institutions and Project Finance: The Dabhol Power Project." July 8, 2019. https://ivypanda.com/essays/politics-institutions-and-project-finance-the-dabhol-power-project/.


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IvyPanda. "Politics, Institutions and Project Finance: The Dabhol Power Project." July 8, 2019. https://ivypanda.com/essays/politics-institutions-and-project-finance-the-dabhol-power-project/.

References

IvyPanda. 2019. "Politics, Institutions and Project Finance: The Dabhol Power Project." July 8, 2019. https://ivypanda.com/essays/politics-institutions-and-project-finance-the-dabhol-power-project/.

References

IvyPanda. (2019) 'Politics, Institutions and Project Finance: The Dabhol Power Project'. 8 July.

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